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TMI Blog1995 (2) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed for election as a director of the first respondent in the annual general body meeting to be fixed on 4-8-1994. Item Nos. 7 and 8 in the notice have been proposed as 'special business'. 3. Along with the suit, the applicants have filed OA No. 708 of 1994 for the grant of interim injunction restraining the respondents in any manner considering the subjects, viz., Item Nos. 7 and 8 of the notice dated 29-6-1994 issued by the first respondent. On 3-8-1994 the injunction application was moved before me. The first respondent's counsel took notice and submitted that the meeting as proposed could go on including the special business, viz., Item Nos. 7 and 8 of the agenda but the first respondent would not give effect to the same until further orders if carried on in the said annual general meeting. On the same day, I passed an order. Instead of granting injunction, I allowed the first respondent to proceed with the annual general meeting with the agenda already printed and circulated to all the shareholders. I made it clear that any decision taken regarding item Nos. 7 and 8, if carried on, will not be given effect to until further orders of this Court. I also permitted all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was wrong. He also accused the first respondent of negligence in not verifying the provisions of section 257 before announcing his candidature. He had further stated that he was entitled to seek re-election and in support of this contention he mentioned that on an earlier occasion when a director was co-opted in a casual vacancy, the said person was not called upon to remit the sum of Rs. 500. Mohanakrishnan also tendered a demand draft for Rs. 500. The first respondent by its letter dated 10-9-1991 rejected the contention of Mohanakrishnan and returned the draft sent by him, as, according to the first respondent, the tender was in violation of the provisions of the Act. It also appears that the said Mohanakrishnan did not pursue the matter further. 6. In the annual general meeting held on 21-6-1993, the second respondent was treated as a retiring director and he was said to have been re- elected. By letter dated 30-12-1993 the first applicant enquired whether the second respondent had remitted a sum of Rs. 500 when he sought election and mentioned that if he had not deposited the amount towards his appointment which took place on 4-9-1990, his appointment would be invalid and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted a different stand against the second respondent. The second respondent was appointed as a director in the casual vacancy and he was treated as a retiring director and he was re-elected on 4-9-1990. (d)The shareholders of the first respondent thought it fit to reappoint the second respondent unanimously and again his term for reappointment came up for consideration at the annual general meeting held on 21-6-1995. The applicants, who were the shareholders even at the relevant point of time, did not choose to object to such appointment or bring to the notice of the first respondent that the first respondent has not followed the procedure under section 257. (e)The first applicant is the father-in-law of one S.R. Kishore, who was an employee of the first respondent, and the third applicant is the brother of S.R. Kishore. The said S.R. Kishore was suspended and later dismissed for the misconduct arising out of the misappropriation of the funds of the first respondent. The matter is sub judice as S.R. Kishore has taken the matter to the Labour Court and the matter is pending disposal. The father-in-law of the said S.R. Kishore, the first applicant and the brother of the said S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s present were only 1,411. Paragraph 25 of the counter-affidavit states that 244 shareholders took part in the poll. However, the result of the poll mentioned states that Manavalan had Fetched a vote of 7,392 votes. There is no mention about any proxy at all in the minutes of the meeting. In the circumstances it is not clear as to how only with 1,411 shareholders, there could be a possibility of 7,392 votes being polled and when the minutes itself does not say anything about proxies. It is cardinal principle of the meetings that if proxies were received by the company, there should be verification of the proxies and there should be an announcement about the number of proxies received which are valid. No such statement has been made. The conclusion is that the company had not received any proxies. In the circumstances, it is impossible for Manavalan to get 7,392 votes unless the minutes themselves are concocted and fabricated." 9, On the above pleadings Mr. C. Harikrishnan, learned counsel for the appellants, argued three points. They are: (a)The explanatory statement for item Nos. 7 and 8 do not satisfy the requirement of section 173 of the Act. (b)The waiver sought for in item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed to continue as a director not withstanding the defect in the appointment and notwithstanding the fact that the company knew the defect in his appointment but on the other hand, in the case of Mohanakrishnan prompt action was taken about the defect even at the time of his candidature. The company was informed about the defect in the appointment of the second respondent by the first applicant's letter dated 9-9-1991. These facts ought to have been disclosed. (c)So far as the second respondent was concerned, the first applicant, had raised the objection in his being appointed as an additional director but in spite of the objection, he was allowed to continue as additional director. According to the first applicant, there is no provision in the articles of association for the appointment of additional director. (d)The second respondent was paid much more than what has been mentioned in the explanatory statement. In the explanatory statement, the waiver was sought only for a sum of Rs. 97,000 but the second respondent had drawn nearly a sum of rupees one lakh in addition to the aforesaid amount. (e)Even before the resolution for waiver was placed before the general body meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain an opinion from counsel and intimated Mr. Mohanakrishnan of the requirement of the compliance of section 257. Mohanakrishnan realised the difficulty and did not pursue the matter. Since the second respondent was appointed as a director unanimously at two annual general meetings held on 4-9-1990 and 21-6-1993 by the shareholders, it escaped the attention of the first respondent of the earlier defect in the appointment on 4-9-1990. However, when it was brought to the notice of the first respondent during December 1993, the first respondent referred the matter to its legal adviser and obtained an opinion. On the basis of the legal opinion, it is noticed that there is a defect in the appointment of the second respondent as a director as a result of non-compliance with section 257 and, therefore, the first respondent informed the second respondent who in turn submitted his resignation on 23-2-1994. The board of directors thought fit that the service of the second respondent was necessary and since the violation was of a technical nature, the board of directors thought fit to appoint the second respondent as an additional director on and from 24-2-1994. 14. Mr. T. K. Seshadri would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng resolution as an ordinary resolution: "Resolved that the recovery of a sum of Rs. 97,320 paid/payable as remuneration and sitting fees to Thiru N.G. Manavalan (the details of which are set out in the explanatory statement), director of the company for the period from 4th September, 1990 to 23rd February, 1994, be and is hereby waived subject to the waiver being approved by the Central Government".' The first respondent has furnished an explanatory statement under section 173(2) of the Act for both the items : "Item No. 7- Thiru N.G. Manavalan was appointed as additional director of the company with effect from 23rd February, 1994. According to the provisions of section 260 of the Companies Act, 1956, Thiru N.G. Manavalan will be holding office until the conclusion of this annual general meeting. Notice under section 257 of the Companies Act, 1956, together with deposit of Rs. 500 has been received by the company from a member signifying his intention to propose the candidature of Thiru N.G. Manavalan as a director of the company. In the explanatory statement, it is stated that Thiru N.G. Manavalan is the son of late Thiru N.C. Giripal Mudaliar (former director of our fund) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for consequential permanent injunction restraining the first respondent from in any manner considering the subjects, viz,, Item Nos. 7 and 8 of the notice dated 29-6-1994 issued of the annual general meeting scheduled to be held on 4-8-1994. In the injunction application, the applicants sought for an interim injunction restraining the first respondent from in any way considering those items in the meeting scheduled to be held on 4-8-1994. When the application came up for consideration before this Court on 3-8-1994 the first respondent took notice. On the same day, I passed an order permitting the first respondent to transact the business mentioned in Item Nos. 7 and 8. But, I made it clear that if resolutions are passed, the same should not be given effect to until the disposal of the injunction application. Subsequently, the first respondent filed its counter-affidavit and also pointed out that the resolutions mentioned as Item Nos. 7 and 8 were carried and as per the resolutions of the elections on poll, the votes polled for and against are as under: Resolution No. 7 : Resolution No. 8 N.G. Manavalan: 7,396 votes Votes polled in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second respondent. The explanatory statement, according to the applicants, should have mentioned that all the sums of money paid to the second respondent are recoverable and the director should be personally liable for the said amount. It is stated by the applicants that the object of the first respondent proposing the subject without proper disclosure is to get through the subject with the mala fide intention of conferring special benefit to the second respondent and to cover up the illegality. 21. In the above background, I shall now consider point (a) raised by Mr. C. Harikrishnan. His objection is that the explanatory statement does not satisfy the requirements of section 173(2). Section 173(2) is extracted hereunder: "(2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular (the nature of the concern or interest), if any, therein, of every director (managing agent, if any, the secretaries and treasurers, if any, and the manager, if any): Provided that whether any item of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. The Bench has further held that it is not the function of the explanatory statement to travel beyond the proposed resolution. It is then stated by the Bench that material facts have to be given but not detailed particulars. 24. Mr. T.K. Seshadri also referred to the following decisions with regard to the proposition that material facts are facts which are relevant to the resolution and not detailed particulars to be given - Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC) at p. 553, Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971]41Comp.Cas.377 (Bom.), Sitaram Jaipuria v. Banwarilal Jaipuria AIR 1972 Cal. 105 at pp. 114 and 115, Escort Ltd's case (supra) Gopal Das Gujarati v. Titagarh Paper Mills Co. Ltd. [1986] 60 Comp. Cas. 920 (Cal.) at p. 928 and K. Meenakshi Amma v. Sreerama Vilas Press & Publications (P.) Ltd. [1992] 73 Comp. Cas. 285 at p. 282. In the decision reported in Sitaram Jaipuria's case (supra), a Division Bench of the Calcutta High Court has held in headnote as follows: "Any and every legal requirement need not be placed before the general meeting of the general body of the shareholders. It is to be presumed that all leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven are irrelevant and not material facts. With regard to item No. 8, material facts were given, namely, how the appointment of the second respondent has become defective and how he drew remuneration as a director of the first respondent, and since this appointment is defective, the first respondent is seeking the approval of the shareholders to waive the recovery. These are all the material facts which are relevant for the resolution. It is urged that the applicants who attended the annual general meeting did not participate in the deliberations when Item Nos. 7 and 8 are placed before the shareholders for consideration. The applicants claim to have knowledge as to the circumstances under which the resolutions are being brought before the annual general meeting. As held by a Division Bench of the Kerala High Court in Meenakshi Amma 'scase ( supra), the applicants being shareholders are aware of the material facts pertaining to the transactions to be carried out at the annual general meeting and as such, they cannot reasonably complain of insufficiency of notice nor did they, having been present at the meeting, point out to the Chairman about the irregularity before the meeting pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment, a resolution to that effect will have no meaning and, therefore, the resolution was defective even from the inception and cannot be placed before the general body. In reply to the above, Mr. T. K. Seshadri contended that the said objection is unsustainable for the reason that the remuneration sought to be paid is for the services rendered. It is on the basis of section 72 of the Contract Act, 1872 as the service rendered by the second respondent is not gratuitous. Section 290 provides that all the acts of the director, whose appointment is found to be defective, till the defect is shown to him, are valid. I am, therefore, of the view, that once his actions as director are found to be valid, the remuneration payable to him during the said period would be only in the capacity as director and it is only with that object the approval of the Central Government is sought by the first respondent and on 5-9-1994 such approval was also obtained, which came to the first respondent after the annual general meeting was over. The first respondent in its application before the Central Government also set out the reasons for the approval which is sought for under section 309. The Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmities, however much they may be confirmed by the general body, they have no legal effect and, therefore, the Court should not permit the first respondent to implement the resolutions. 26. As pointed out earlier, the first respondent has filed a detailed counter-affidavit which has already been summarised by me in paragraphs supra. According to Mr. C. Harikrishnan, the decisions cited by Mr. T.K. Seshadri will have to be understood on the facts arising in each case. None of the decisions held that a meeting could go on with a defective and misleading explanatory statement as in the present case. The adequacy of an explanatory statement is a question of law and the expression 'material particulars' has to be viewed in accordance with the company and the substance of the resolution proposed. In the present case, the explanatory statement proposed by the first respondent fails the test. The facts which ought to have been mentioned in the explanatory statement as pointed out by the learned counsel for the applicants earlier, have been deliberately and with mala fide objects concealed. Therefore, there cannot be a better example of duping the shareholders by the management than the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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